MAY 12 1986
SMALL BUSINESS AND GENERAL DIVISION N.R. Mitchell (613) 957-2139 D.J. Bennett
This is in reply to your memorandum of February 18, 1986, in which you request our comments about your proposed reply to an inquiry by XXXX on the subject of taxable benefits arising from certain housing loans made to employees who relocate at the company's request. We regret the unavoidable delay in responding.
We shall confine our comments to the second of the two fact situations about which XXXX has inquired. That situation is as follows:
(a) The loan is advanced by a third party which is a lending institution.
(b) The employee uses the loan as a down payment on a residence at the new work location.
(c) The employee pays interest to the lending institution at the market rate.
(d) XXXX reimburses the employee for the interest paid in respect of that loan.
(e) The loan is repaid from the proceeds of sale of the previous residence.
(f) XXXX is not involved in the acquisition of the loan, however, an agreement to reimburse the interest costs of the loan is entered into with the employee prior to his obtaining the loan.
Based on the information provided, we are unable to share your certainty that this would be a loan to which section 80.4 of the Income Tax Act applies. As explained in paragraphs 2 and 3 of IT-421R , section 80.4 of the Act only applies to an employee where it can be shown that the loan or indebtedness is attributable to the employment or future employment of that individual. In other words, there must be some causal connection between the individual's employment with the employer and the fact that the loan was made and/or the terms of that loan. The issue of whether or not the degree of involvement by the employer satisfies this requirement of the Act would be a question of fact in each case. Naturally, where the employer is actually a party to the loan contract, for example, by serving as guarantor of the loan made to the employee, the requirement in question would invariably be satisfied.
XXXX the situation under consideration, there would apparently be no involvement by the employer in the negotiating and granting of the loan by the lending institution; there would simply be a separate agreement between the employer and the employee whereby the employer would reimburse the employee for his interest charges. On this basis, it is our view that section 80.4 of the Act would not be applicable and that the interest paid to the employee by the employer would constitute a taxable benefit under paragraphs 6(1)(a) or (b) of the Act and must be reported on a form T4A.
Subject to the above comments, we are in agreement with the other aspects of your proposed reply.
ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR
P.D. FUOCO for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch